Politico Pro

Emboldened by what's expected to be a more business-friendly White House come January, the private student loan industry is making a push to expand its role in the Department of Education's growing $1.3 trillion portfolio of federal student loans.

A main lobbying group for the industry wrote a letter this week to President-elect Donald Trump's transition team, making a series of proposals that included a bold plan to auction off some of the existing portfolio of federal loans to private investors.

And banks and other industry players like state-based loan agencies are also itching for the new administration and a GOP-controlled Congress to give them a larger stake in the federal government's student loan programs.

"We believe banks should play a bigger role in the federal student loan program because of the benefits private lenders bring to the table," said Richard Hunt, president of the Consumer Bankers Association.

The efforts come after many in the industry have struggled in recent years — following the Obama administration's successful push to cut banks and other private lenders out of the federal student loan system, which was approved by a Democratic Congress in 2010. That change expanded the share of loans disbursed directly by the federal government, and put a squeeze on the guaranty agencies and other lenders that used to receive subsidies to make and insure federally guaranteed loans to students.

Banks and other for-profit and non-profit loan industry organizations argue that they can do a better job of originating and servicing federal student loans than the Education Department. And they have sympathetic ears among many congressional Republicans, who blasted the Obama administration's ending of subsidies to banks and private lenders as a "federal takeover" of student lending.

But critics say that argument falls flat. Jason Delisle, a resident fellow in education policy studies at the conservative-leaning American Enterprise Institute, said efforts to insert private lenders into the federal loan program — or sell off federal loans to private investors — amount to "a lot of financial alchemy."

"There's no such thing as private capital in a government program — it's a pretend concept," he said, adding that there's no value to creating a role for private lenders in the federal student loan system. "At best it would be zero sum, but probably more likely it would be a net loss for taxpayers."

A more realistic way to scale back the federal role in student lending, Delisle said, would be to eliminate or cut back on federal loans for parents and graduate students, both of which tend to have higher costs to the government. Private lenders could then fully supplement federal loans in those cases, he said.

The National Council for Higher Education Resources, which represents a wide range of private loan industry players, sent a letter Wednesday to Trump's transition team that floated the idea of auctioning off some of the Education Department's existing loan portfolio to private investors.

"One such short-term idea is to securitize a portion of the Direct Loan portfolio initially on a limited basis using state, nonprofit, and for-profit entities, who could be responsible for servicing and collecting the loans," the group's president, James P. Bergeron, wrote in the letter. "This would remove the debt, and the corresponding risk, from the nation's balance sheet and decrease taxpayer exposure."

But such a plan carries some serious risk, critics say. Rohit Chopra, a former Consumer Financial Protection Bureau official who worked on student loan issues, cautioned against selling off federal loans to private investors.

"Wall Street definitely misses the good ol' days when bankers could milk the system with sketchy student loan securitization deals," he said. "But recent history has shown how securitization led to misaligned incentives and servicing failures, which we cannot afford to repeat. Some of the most problematic practices in the student loan industry, like auto-defaults and loan modification mistakes, stemmed from the student loan securitization boom in the run-up to the financial crisis."

Other groups representing student lenders say they see the Trump administration as an opening to propose changes to the federal student loan system as well.

"We're looking at opportunities to have nonprofit organizations play a larger role in the federal student loan programs," said Michele Streeter, a spokeswoman for the Education Finance Council, which represents state-based and private, nonprofit lending organizations. Streeter said the group is looking at ways to make sure "resources in the federal loan program can be targeted first and foremost to low-income borrowers."

In their quest to return some private-sector involvement to federal student lending, the industry is likely to find allies in congressional Republicans.

Rep. Virginia Foxx (R-N.C.), the incoming chair of the House education committee, told POLITICO last month that she'd like to undo the Democrats' decision to cut banks out of the federal student loan program. Student lending is "not a function of the federal government," she said, adding that she's still studying alternatives to the current system.

And the Republican party platform adopted this summer called for completely ending the federal direct student loan program and restoring greater "private sector participation in student financing."

Yet it's not clear where Trump's administration will land on an array of issues surrounding federal student loans. On the campaign trail, Trump proposed a more-generous version of federal income-based repayment for student borrowers. He also criticized the federal government for making a "profit" off of federal student loans, echoing an argument that liberals like Sen. Elizabeth Warren (D-Mass.) have made to support lowering interest rates on federal loans.

Trump's pick to lead the Education Department, Betsy DeVos, doesn't have much of a record on student loan issues either. But she and her husband are indirectly invested in the private lending company Social Finance Inc., known as SoFi, according to The Wall Street Journal.